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Avoiding Probate

April 23, 2013

Probate is an expensive and time consuming court proceeding that can usually be avoided with some simple advance planning.

The most common method used to avoid probate is to hold assets in “joint tenancy.” An example of this would be husband and wife owning a house and both names appearing on the deed with the word “joint tenants” written after their names. The survivor of the couple automatically inherits the property without the necessity of probate, or any court action. Although there may be some income tax consequences, this is the quickest and easiest method of avoiding probate. Some of these tax issues may be resolved by couples holding property as “community property with rights of survivorship.” This is a relatively new way to hold title. It allows husbands and wives to have the tax advantages of holding property as community property, along with the simplicity of the property automatically passing to the surviving spouse as in a joint tenancy situation.

If you decide to use joint tenancy, I strongly urge that it be restricted to husbands and wives. Joint tenancy should not be used between parents and children. There are at least 4 reasons for this. First, parents and children sometimes have very bitter fights. Parents should be able to retain absolute control of their property as long as they are alive. Second, the child may be involved in an unhappy marriage. The child’s spouse could make a claim against the property. Although the spouse would probably lose, the parents may have to spend considerable money and effort to fight the claim. Third, the child may be involved in some other litigation or perhaps a vehicle collision with insufficient insurance. The child’s creditors could, then attach the parents’s property. Fourth, the child could, for some reason, have to file bankruptcy. The bankruptcy trustee would seek the parents’ property to pay off creditors. All of these situations could do irreparable damage to the financial stability that the parents have worked a lifetime for.

Some estates consist of only bank accounts, certificates of deposit, and/or stocks and bonds. In these situations, the accounts can be held in your name “in trust for” or “pay on death” to someone else. As long as you are alive, you may do as you please with the money. Upon your death, whatever is left in the account will automatically go to the beneficiary without court proceedings. This type of estate planning would not be recommended for people who have young children or concerns about their children’s ability to handle money. If a parent died with a young child, the money would remain in trust for the child, but the child would be able to demand the full amount at age 18.

Although the “in trust for” and “pay on death” accounts work well with liquid assets, in any estate where there is real property or deeds of trust, the only realistic and practical method of avoiding probate is to have a living revocable trust made before your death. You may keep complete control of the trust by naming yourself as trustee. You should also retain the power to change or revoke the trust during your lifetime. Upon your death, a successor trustee, already named in the trust document, immediately steps in and distributes the trust assets in accordance with the terms you have dictated. Because the trust owns the property, there are no assets to be probated upon your death.

In addition to avoiding probate, the trust has several other advantages. First, it keeps your affairs confidential because no public inventory is filed with the court. Second, it will usually contain instructions in the event of your incompetency which will avoid a conservatorship. And, third, for the larger estate, a trust may avoid hundreds of thousands of dollars in federal estate taxes.

To illustrate what a trust can save in terms of hard dollars, consider the example of an estate of $750,000. The attorney’s fees and court costs for probate will be in excess of $19,000.00. The cost of preparing a trust for an estate of that size will usually be under $2,000. In larger estates, the savings are even more dramatic. In an estate of $4,000,000, a husband and wife by having a properly drawn trust may save more than $35,000.00 in probate fees. Because of these enormous savings, I almost always recommend trusts to any of my clients who have substantial estates.

In addition to the savings in probate fees, a properly drawn AB Trust can save hundreds of thousands to millions of dollars in Federal Estate Taxes. At the current time estates greater than $4,400,000 are subject to estate taxation. This number is indexed for inflation. Husbands and wives together, with a properly drawn trust may pass up to $10,800,000 without paying Federal Estate Taxes. If you have an estate of $10,800,000 you can save close to $2,000,000 in taxes.

Two final notes. First, many people are under a misconception that they will avoid probate by having a will. This is simply not true. A will merely states who gets the property and who has the right to go to court to conduct the probate proceeding. Second, as we all know, the best method of avoiding probate is to spend it all first.